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Tuesday, November 3, 2015

5 Differences between NRE and NRO Fixed deposit -HDFC ICICI SBI Kotak

Difference between NRE and NRO fixed deposit

NRI has two option to invest in Fixed deposit in India NRE fixed deposit and NRO fixed deposit, but you need to be careful whether you choose NRE or NRO fixed deposit as taxation rules on NRE and NRO Fixed deposit is different. Principle and Interest earned in NRE fixed deposits are completely tax-free while interest earned on NRO fixed deposit are subject to TDS and deduct at the maximum rate of 30%. Also, you can send rupees back to your overseas account if it is held in NRE fixed deposit, but you can not repatriate money from NRO fixed deposit.
In this article, we will see some differences between NRE and NRO fixed deposit opened with any Indian banks like ICICI, HDFC, SBI or Kotak Bank and find out whether you should open NRE fixed deposit or choose NRO fixed deposit based upon your requirements.

In short, if you are opening fixed deposit from overseas money by converting it into rupees then send it to your NRE saving account and create an NRE fixed deposit right there. On the other hand, if money is earned in Indian rupees via different income sources e.g. dividend or income from rent then you must have an NRO saving account to receive those amount, use this amount to create an NRO fixed deposit.

In both the cases, it's not good to leave money idle because they will earn fewer interest rates. Also, if you eventually thinking to repatriate or send money back to your overseas account, think of opening an FCNR fixed deposit, this will reduce your exchange conversion risk and you may yield better returns if US dollar becomes stronger in next few years.

Difference on NRE and NRO FD

NRI can open both NRE and NRO FD in one bank and online by using his NRE or NRO Savings accounts but before opening NRE or NRO FD, you must know taxation rules related to both of them because that will make the difference in your overall interest gain or yield. Here is few notable difference between NRO and NRE fixed deposit:

1) TaxationFirst and the major difference between NRE and NRO fixed deposit is that interest earned on NRO fixed deposit is taxablein India. it means you need to pay income tax on all their interest you earned in NRO fixed deposit with a rate of 30.9% which is quite higher, on there other had interest earned on NRE fixed deposit is exempted from tax in India. Which means you don't need to pay any income tax on interest accrued in NRE fixed deposit. This difference alone is significant enough to choose NRE fixed deposit over NRO fixed deposit. By the way if you don’t have lump sum amount to invest, you can take benefit of NRE or NRO Recurring deposit, to lock your money with higher interest rate and soaring exchange rates.

2) Fully repatriableAnother difference between NRE and NRO fixed deposit is that, In the case of NRO fixed deposit you can not repatriate principle back to the foreign country, you can only transfer interest earned on NRO fixed deposit to the foreign country or abroad where you staying. On the other hand, NRE Fixed deposit allows you to transfer both principle and interest to abroad. Everything from principle to interest earned is fully repatriable in NRE fixed deposit. This is another significant difference between NRO and NRE fixed deposit which suggest choose NRE over NRO FD. See here to learn more about repatriation.

3) Joint account with Indian parentsOne more difference between NRE and NRO term deposit is that you can open NRO term deposit jointly with your family member which is not NRI, means parents staying in India or any immediate family member staying in India can hold NRO term deposit along with you. On the other hand NRE, term deposit can only be open jointly with another NRI, which is kind of restriction if your family is staying in India. This can be a very important difference depending upon the personal situation of NRI. IF you are an unmarried software professional working in abroad and want to open joint fixed deposit then you can choose NRO fixed deposit over NRE fixed deposit. If you want to keep your money on foreign currency like USD, GBP, AUD etc, you can also choose to open FCNR fixed deposit with HDFC Bank, ICICI, SBI, RBS and Kotak Mahindra. FCNR deposits are free from exchange rate risk and also provide better interest rates than Fixed deposit with local foreign banks e.g. Citibank or Bank of America in US and Canada

4) Interest ratesAnother difference between NRO and NRE term deposit is their interest rates. Currently difference on interest rate is not much between NRE and NRO fixed deposit but if you see better interest offered in NRE fixed deposit than you can leverage that because both NRE and NRO fixed deposit holds money in Indian Rupees (INR) but just be cautious and read first few differences between NRE and NRO fixed deposit if you intention is taking money back to abroad because both NRE and NRO term deposit are subject to Currency risk, if Exchange rates will not in your favor once your NRE or NRO FD matures then you might lose instead of gaining for depositing money in Indian Rupees for 3 years in India, on the other hand, you might get better returns if exchange rates turn into your favor. Anyway, I suggest avoiding currency risk and only investing amount which you definitely want to keep as Indian Rupee and don't want to repatriate. There is other options available like FCNR Fixed deposit which allows you to keep money in foreign currency and get better returns than what is offered by foreign banks.

5) Depositing moneyAnother difference between NRE and NRO fixed deposit is How to transfer or deposit money? NRE fixed deposit can only be open by sending foreign currency cheque, remitting foreign currency directly to your NRE Saving account using money2India, remit2India or click2Remit or any other remitting services. You can not open NRE fixed deposit by transferring Indian rupees from any other Resident or NRO Saving account. this is a restriction, On the other hand, NRO Fixed deposit can be open by transferring money from NRE Saving account or income earned in India, e.g. Rental income, Stock dividends, short-term capital gains, long-term capital gains etc.

Here is a nice table which summarise the difference between NRE and NRO fixed deposit account for any bank in India:

These were some of the important differences between NRE and NRO fixed deposit, which will help you to decide whether you should invest in NRE fixed deposit or open an NRO fixed deposit. Decide based upon your need and priority. My suggestion is that if choose NRE fixed deposit over NRO fixed deposit t to get tax benefits and facility to send principle and interest back to foreign currency in case your required. Chose NRO fixed deposit if you want to open term deposit account jointly with your Non NRI family members.

20 comments:

This is really good list to choose between NRE vs NRO fixed deposit. I didn't really know that there are two options for opening fixed deposit for NRI Indian and there is so much difference between NRE vs NRO fixed deposit. I heard about FCNR deposit as well, Can you also put similar points for NRE vs FCNR fixed deposit for 3 year tenor

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@Anonymous, Tax will only be on capital gain not the full amount and if you have sold your shares after 3 years, you don't need to pay any tax on this amount, but yes you need to file your income tax return. If that's not the case and you earned 5 lakhs as capital gain then also bank will not deduct as TDS. You can put some part of this money on ELSS and other investment vehicles to claim against section 80C. At the end, you need to pay tax on your taxable income.

I use State Bank of India or any government bank for large FDs. The current rate of interest that the bank offers is between 7.25 to 7.5% for any deposits up to 365 days.The 7.5% is for those fixed deposits that are between 365 days and 2 years.

Government banks offer 7.25% for deposits up to 1 year and 7.5^% for deposits over 365 days. I use State Bank of India or Andhra Bank. As an NRI, having an account with a government bank also helps provide one address proof when renewing my passport, so it serves multiple functions.